The Seniority Structure of Sovereign Debt

Abstract

Sovereign governments owe debt to many foreign creditors and can choose which creditors to favor when making payments. This paper documents the de facto seniority structure of sovereign debt using new data on defaults (missed payments or arrears) and creditor losses in debt restructuring (haircuts). We overturn conventional wisdom by showing that official bilateral (government-to-government) debt is junior, or at least not senior, to private sovereign debt such as bank loans and bonds. Private creditors are typically paid first and lose less than bilateral official creditors. We confirm that multilateral institutions such as the IMF and World Bank are senior creditors.

Dealing with Debt: Less Risk for More Growth in Latin America and the Caribbean

“…36 A detailed history of bilateral debt for the last two centuries can be found in Horn, Reinhart, and Trebesch (2020). On the dynamics of seniority of different types of sovereign debt, see Schlegl, Trebesch, and Wright (2019). 37 In fact, the rise in the share of MDB lending in total official lending follows capital increases at the World Bank in 1988and at the IDB in 1990 See Horn, Reinhart, and Trebesch (2021) for a detailed discussion on Chinese sovereign lending and the way it is counted.…”

Pandemic shocks and fiscal-monetary policies in the Eurozone: COVID-19 dominance during January–June 2020

“… 10 The perceived seniority of the ECB and other institutional support versus the private sector may be subject to on-going revisions. In this context, Bulow et al (2020) noted, ‘Although theoretically the official sector is a senior creditor to the private sector, much of the historical experience suggests otherwise.’ A recent analysis comparing losses (haircuts) taken by official and private creditors raises further doubt about the supposed seniority of official sector loans ( Schlegl et al , 2019 ). These outcomes should not be surprising.…”

Preferred and non-preferred creditors

“…The blue/gray shaded area in Figure 5 depicts the set of feasible risk-free IFI lending as a function of the di¤erent parameters of the model. 28 At very low values of (the probability of requiring …nancial assistance), no preferred lending (the green line) nor market lending (the red line) is supported. As rises, market lending becomes feasible, and then at still higher values of preferred lending also does and the amount of IFI preferred lending increases as increases.…”

“…Second, within the large empirical literature on sovereign defaults, a subset of papers consider defaults (and the building up of arrears) on IFIs. Schlegl et al (2015Schlegl et al ( , 2019 claim a hierarchy in seniority with the IMF and MDBs at the top. Their analysis is based on World Bank data and covers 127 countries from 1980 to 2006.…”